An interesting unpublished case has come down holding that the community property interests of the debtor and the debtor’s spouse are part of the bankrupt’s estate and are subject to an automatic stay.

Now it’s important to remember the California Rules of Court provide that “an opinion of a California Court of Appeal or superior court appellate division that is not certified for publication ordered published must not be cited or relied on by a court or a party in any other action.”  The only exceptions to this rule are when the unpublished opinion “is relevant under the doctrines of law of the case, res judicata, or collateral estoppel” or “is relevant to a criminal or disciplinary action because it states reasons for a decision affecting the same defendant or respondent in another such action.”

*Any violation of the rule against citing or relying upon an unpublished opinion may lead to monetary sanctions and striking of the brief.  All unpublished opinions, such as this one, should be used for educational purposes only, and should not be cited or relied upon except as permitted under the California Rules of Court.

IRMO Prestholt, an unpublished opinion of District 2, Division 7 (filed may 22, 2012), was a 2006 status-only judgment of dissolution that terminated the parties’ 14-year marriage.  In 2007, the trial court ordered Husband, an attorney, to pay to Wife $5,000 per month in spousal support, “subject to retroactive modification,” until further order of the court.  Due to the fact neither party had worked for at least a year, the court also ordered that certain assets would be refinanced or sold.

Husband filed for bankruptcy in 2009.  Wife moved for relief from the automatic stay to allow Husband’s children and spousal support obligation to be determined, to deal with his withdrawal of $50,000 from a 401(k), and to characterize an annuity.  The bankruptcy court authorized Wife to seek a ruling from the superior court on issues relating to the custody, visitation, and support as well as “to adjudicate the nature of her interest in all of property in the Debtor’s bankruptcy estate.”

In 2010, the bankruptcy court approved the sale of Husband and Wife’s home and the distribution of Husband’s homestead exemption.  In the same year, Wife’s superior court trial brief stated the only issues to be resolved were family support and attorney’s fees, arguing Husband’s separate property was within the jurisdiction of the bankruptcy court and the division of community property would be addressed there.

Husband countered that the bankruptcy court order required the superior court to determine Wife’s interest in the property in the bankruptcy estate.  Wife argued the bankruptcy court order permitted her to do so but that she chose instead to relinquish that right to negotiate a settlement with the bankruptcy trustee.

The superior court ruled the bankruptcy court order gave Wife a choice about how to proceed and that she properly elected to negotiate a settlement with the trustee of Husband’s bankruptcy estate that disposed of any claim she may have in the property.  The superior court also ruled that Husband’s post-petition claim against Wife for breach of fiduciary duty could not be pursued because he did not obtain relief from the automatic stay.

Later in 2010, notwithstanding the earlier ruling by the superior court that it was precluded from adjudicating property issues, the superior court entered a judgment that stated, “All community real property was sold through the bankruptcy court” with proceeds to be distributed through the bankruptcy court, “all community debts have been paid through bankruptcy or will be paid through the bankruptcy court”, and “all community personal property was abandoned by the bankruptcy court.”

Husband appealed, and the California appellate court affirmed in part and reversed in part.  According to 11 U.S.C. § 362, filing a bankruptcy petition triggers an automatic stay of actions against the debtor, the creation of an estate, and the appointment of a trustee.  The stay is one of the most important protections in bankruptcy law and its scope is broad and remains in effect “until such property is no longer property of the estate.”

The bankruptcy court has exclusive jurisdiction to determine the scope and applicability of the automatic stay.  But notwithstanding the breadth of the automatic stay, several types of actions and proceedings are exempted.  In family law, the filing of a bankruptcy petition does not stay commencement or continuation of proceedings to establish or modify an order for “domestic support obligations.”

It also does not stay proceedings concerning child custody or visitation.  But proceedings to determine the division of community property that is property of the bankruptcy estate are not exempted from the automatic stay.

Community property interests of the debtor and the debtor’s spouse at the commencement of the bankruptcy case must be transferred to the estate and bankruptcy courts must then look to state property law to determine the separate or community property character of the property and what is and is not to be included in the bankruptcy estate.  Due to the fact property acquired in joint form during marriage is presumed to be community property, all such property not yet divided by the state court at the time of the bankruptcy filing is property of the bankruptcy estate.

The state court is permitted, however, to divide exempt community property interests or property abandoned by the trustee.  But if a dispute about marital property is to proceed in state court, the non-bankrupt spouse must file a motion with the bankruptcy court to lift the stay for cause.  Because state courts have expertise in family law matters, such a petition is frequently granted.